Much Worse Than You Think: International Economic Diplomacy

A fundamental principle that we all hold dear is: in industrialized countries, with relatively high income levels, the government can’t be completely out to lunch.  After all, we reason, there are democratic processes, watchdogs of various kinds, and we can safely delegate monitoring of government official actions to others (e.g., the media). 

This principle is, of course, now appropriately called into question both for government officials directly and increasingly for the media’s scrutiny of what the government (and business) is doing.  As a result, the level of public attention to various domestic policies – bailouts and the like – is surely at or close to all-time highs; the current reaction time and seriousness in public discussions of various initiatives for banks must set some sort of record.

Yet there remains at least one completely murky and unaccountable area of government action: international economic diplomacy.

The G20 summit, broadly, is a leading example (as is the G20 process since the fall).  No one can believe that this really achieved nothing because that would be, well, dumb.  And we know our rulers are not stupid.

But smart people frequently produce unfortunate or even idiotic outcomes – it all depends on the incentives and the process.  And, of course, of their ability to keep things covered up until they have moved on to another job.  Check with your local subprime mortgage lender for details.

As a leading example of what you can get away with in the international economic diplomacy space, I would emphasize how key European governments (France and Germany, also the UK to a large degree; the EU and others tag along) are currently viewing the issue of resources for the IMF – and I would link this to how they and the previous U.S. Administration treated the IMF’s staff and capability more generally.  From my op ed in The New Republic on-line this morning (I’ll post the link below when it goes live),

The only slight ray of hope [from the G20 process at present] is the American idea to increase funding dramatically for the International Monetary Fund. In addition to enabling the Fund to help emerging markets as they increasingly fall into the danger zone, it should provide a backstop for the eurozone–in case France and Germany fail to provide it themselves.

Yet even on this dimension, the news on Saturday was bad. Secretary Tim Geithner this week proposed an additional $500 billion for the IMF–this would constitute a bold and long overdue tripling of its loanable resources. But the West Europeans are, inexplicably, digging in around the idea that there should be only another $250 billion for the Fund (and they haven’t actually offered to pay anything themselves). Providing these resources has no budgetary implications and no other financial costs for the countries that choose to hold their reserves partly as a line of credit to the IMF. Without significant money for the IMF from European countries with deep pockets, though, there is no hope of attracting large-scale resources from emerging markets. And if the IMF is short of funds, it has no alternative but to negotiate tougher lending programs with countries that need external financial assistance. To you and me, the implications are simple and stark: a longer recession and a more difficult recovery. So why not do it?

It is, pure and simple, the kind of short-sighted and deluded European financial policy that prompted leading countries to demand that the IMF cut 20 percent of its most skilled and experienced personnel in early 2008–at the same time as Bear Stearns collapsed and major banks in almost all industrial countries started to unravel. It is hardly believable–but nevertheless true–that the G7 and now the G20 have refused to undo the IMF cuts and replace essential staff.

Yes, European leaders and the Bush Administration pushed hard for the IMF to cut back on skilled and experienced staff just as the global crisis broke – and as the IMF was emphasizing, politely in public and pointedly in private, that this was a major crisis likely affecting all countries.  In fact, given that this emphasis was not welcome by governments, this apparently hardened the resolve of key players to push through senseless, unnecessary, and irresponsible cuts.

Egregious stupidity and borderline malpractice goes unnoticed in the international economic diplomacy space, or at least not picked up on by leading news sources or in the general public discussion.  Why?  To some (the media), it doesn’t quite meet the threshold for newsworthy – it’s a little too far from the interests of readers and a bit too hard to explain in a news program; nobody cares as much about international issues as they do about domestic bailout scandals – for which there is a much higher tolerance for compelling details.  To others (much of the public), it seems too technical and surely something best left to experts.  And – remarkably and mistakenly – those who follow the IMF closely (e.g., in the development community) think that this downsizing somehow fits with what they have been trying to achieve; they were completely snowed.

European policy towards the IMF is a masterpiece of misdirection and disinformation.  The proportions and audacity should take your breath away.  And of course the same principle applies to government officials dealing with international economic policy as it does to CEOs of failing banks: never admit responsibility and definitely never suggest there was the slightest mistake in the past (because that might actually be newsworthy to the mainstream or, even more scary, draw Jon Stewart’s attention).

Rearranging the deck chairs on the Titanic looks productive by comparison.  The actions of the G7 with regard to the IMF in 2008 – and the attitudes of the Europeans still today – are more like burning lifeboats and throwing skilled pilots overboard.  In this context, what are the odds that the upcoming G20 heads of government summit on April 2nd will truly be productive?

35 thoughts on “Much Worse Than You Think: International Economic Diplomacy

  1. China, Brazil and India wants to increase their representation on the IMF. The success of the G20 will hinge on this. The proposal to regulate hedge funds will wipe it out of existence. That will please a lot of countries, whether the US will agree is another matter.

  2. Hi,

    Thank you for your great blog. I beg to differ on the opinions. But certainly appreciate your candid and straight talk.

    You said “the West Europeans are, inexplicably, digging in around the idea that there should be only another $250 billion for the Fund”.

    This is very explicable. But possibly unpleasant.

    Keep in mind that I am a cash-based saver. Trashed by years of lax monetary policies. I then certainly understand and support this inexplicable behaviour.

    IMO every time, political decisions have been reached, they tend to be “spend the money” ones. Used to be spend on the base that deficits do not matter. Or not enough. Now the mantra is taxfree spending. On the base ballooning central banks do not matter. Or at least not enough. For the time being.

    How can you stop unwilling debtors to stop endebting themselves when banks just do not do the work? No way except through major crises. In the current case, through full-fledge monetary ones?

    As a saver and a massively cash-based one – no home no equity – I expect the monetary markets to do a job no politician will ever indulge in. Putting financial things in order.

    There is now only one way to stop those massive external deficits? Via monetary crises.

    Why the hell should one part of the world produce and get only paper money as a return. That makes no sense. Even if the producer is a willing party.

    Why should savers and money markets accept below-inflation interest rates in all major currencies except the Chinese one?

    Let us just hope the IMF can come up in due time. By the way, I do see why Germany – that had its rought times tidying their situation – or France – could or should replace the IMF in the current situation.

    A monetary zone is certainly not a place where countries rule over others. The IMF is a banking organization. It will reach decisions that no Eurozone politician may.

    Supporting the current level of asset prices in the South of the Eurozone via cash injection is simply no solution. Avoiding necessary monetary adjustments in Eastern Europe – because that would hurt European banks or local real estate investors – makes no more.

    I am getting rough here. And politically incorrect. But is it politically correct not to pay your money back in due time and conditions?

    Daniel – Eurozone saver

  3. BEIJING, March 11 – “China’s central bank said on Wednesday it has agreed a three-year currency swap with Belarus worth 20 billion yuan ($2.93 billion)… The swap, which may be extended, complements a $2.5 billion loan from the International Monetary Fund approved last year to help the ex-Soviet state overcome the global economic crisis… At the beginning of January, Belarus proceeded with the IMF’s recommendation for a 20 percent devaluation of the Belarussian rouble and tied the currency to a basket of currencies made up of the dollar, euro and Russian rouble… The swap is the latest example of China using its financial clout for diplomatic ends…”

  4. “…The United States also wants Saudi Arabia to help boost the International Monetary Fund’s resources. A Saudi government adviser said that the kingdom, which has invested conservatively and largely in U.S. Treasury bonds, now holds the world’s third-largest foreign exchange reserves, had the world’s third-largest trade surplus and was “key” to the Group of 20 summit…”

  5. Time to enact the Posen Doctrine – the bank crisis action plan recently put in front of congress by the deputy director of the Peterson Institute, Adam Posen.

    This says, in short: sack ‘em. Sack the bank management, sack the regulators and sack the supervisors, because in a banking crisis all these parties are incentivised to lie and spin and obfuscate. Only then will you get the visibility and steeliness to decide which banks are going to survive and which should fail.

    Maybe your colleague is making life uncomfortable for the ruling elite. I hope so :-) More power to his elbow.

  6. Well, well. I think that also Prof. Krugman deserves to study more International Economic Diplomacy instead of writing that “maybe European integration and the creation of a common currency was a mistake”. Europe does not “need to prove the skeptics wrong”, or “its politicians start showing more leadership” (than US????). Europe must just learn not to follow US bad exemples (in finance) and US economists bad advises…

  7. I guess I don’t understand this post. Where is this money for the IMF supposed to come from? We don’t have it. Do we borrow it from the IMF?

  8. *sigh*

    League of Nations 2.0

    Entirely predictable (and predicted).

    Multilateralism will not succeed in such a short time with so many challenges – it has it’s place in the world, but not now.

    It is time for the US to start playing hardball. That means unilateral and negotiated bilateral action. Not just in its own interest, but in the interest of the rest of the world too.

    Let’s just precisely understand Germany’s attitude (and to a lesser degree that of France, Switzerland, etc.)

    “We want our money back now!”

    Their response to Eastern Europe? Suck it dry to cover bank debt (after encouraging lending to and consumption within Eastern Europe for the last decade).

    Their response to the IMF? Very nice, you pay for it, we’ll hoard money.

    Their response to stimulus? Very good, you spend, we will export – and get rid of that “buy American” attitude! (They do rightly note, however, that their social programs are inherently more countercyclical than those of the US.)

    Governments (particularly when working within a multilateral framework) cannot possibly move as fast as international capital markets. Particularly with incentives to defect (this is a Prisoner’s Dilemma game)

    So far, all of the major US international efforts – fund the IMF, pass 2-3% GDP stimulus programs, keep trade barriers low, etc. – all of them have incentives to defect.

    The only one that does not is monetary policy.

    The world’s major currencies are all killing debtors by preserving high currency valuations when the world is de-leveraging.

    The reason: Terror that when deleveraging stops, inflation will kick in. All of this comes about because of dependence by governments on private institutions (banks, hedge funds, etc.) to maintain the size of the world money supply.

    Perhaps the solution to deleveraging is not to encourage re-leveraging. Perhaps it’s to replace privately created money with publicly created money (so the Fed can have more direct control over the money supply, and is less reliant on Velocity, which can radically change when risk perceptions change).

    So, pump in money, and to prevent a “rebound effect” when confidence is restored, reduce capital-asset ratios proportionately to the amount of money pumped in. This will force long-term deleveraging, remove systemic risk, and avoid a massive short-term credit crunch.

    This should actually prevent long-term inflation (which will really destroy cash based savers) and prevent government defaults (particularly if led by world major currencies).

    Who suffers? Honestly, banks and certain hedge funds, by losing the ability to leverage as highly (and therefore make one-sided bets).

    If the G20 was _really_ interested in the prosperity of the world, they would do all of this at the same time:

    1) Open up the Basle Accords, and create a fixed schedule (phasing in over ~3 year period) to reduce capital/asset ratios to levels which are less prone to causing systemic risk. This would prevent inflation by permanently taking down worldwide leverage levels.

    2) Set monetary inflation targets, to be achieved through global quantitative easing to allow member countries to both reduce debt _and_ temporarily hold to existing expenditures. This would pick up the slack from deleveraging.

    3) Regulate large pools of international money – whether they be money havens or hedge funds – to prevent excessive leverage. Remove all of the loopholes.

    Alas, this shall not happen – the Wicked Witch of Western Europe wants her money back. Now.

  9. While commendable, if everyone was a cash-based saver, we would have disaster. Someone needs to be making investments. Governments have many good reasons to incentivize individuals to invest rather than save excessively in cash (i.e. hoard wealth) – good investments have many positive externalities.

    However, the real dilemma for cash based savers is not simply lax monetary policies – it’s worldwide leverage. The real cost to extending loans is not paying interest rates on deposits. This is a fallacy, and is no longer true. Because of extreme leverage, the real cost is risk of default/and or availability of collateral to secure against risk of default.

    The problem (in the last 25 years) is the leverage system itself – NOT national monetary policy.

    The leverage system severely punishes cash based savers for long periods of time when bubbles are forming. Then cash based savers have the ability to buy up assets really cheaply during bad times. Leverage intensifies the boom/bust cycle, and govts (even under “conservative” political parties) have proven they cannot save money in good times.

    Having been burned so badly for decades, cash based savers are now justifiably irate that they don’t get their payback – the opportunity to buy foreclosed homes for pennies on the dollar, or other assets cheaply. In the national debate, those voices which so viscerally oppose active monetary policy argue, essentially, that cash-based savers deserve to be rewarded for holding cash. And their reward is to clean up as the rest of the world suffers, and the world is better off now that our collective assets are in responsible hands.

    This is the reality underlying various arguments that Depressions are normal and healthy for the world economy…

    For example:

    That is the essence of this debate. There are many valid arguments against this position, but rather make them here, I will simply point out that the terms of the debate were dramatically altered due to the bank bailout.

    By bailing out those who made one-way bets at the expense of the taxpayer, the govt. has replaced bad assets with cash. Now, the entities which get to “clean up” are precisely those that received cash infusions (at the expense of taxpayers). (And they received these cash infusions after disbursing their “profits” to various constituents over 20 years.)

    This crisis – and others before it – have proven that governments cannot hold the line against these politically powerful groups… for the simple reason that doing so would virtually ensure Great Depression 2.0. (Professor Simon argues this is due to “Too Big to Fail”; I suspect this would happen with a plethora of smaller institutions as well – as happened in the original Great Depression – simply due to the fact that there is too much leverage in the world.)

    The real solution is not simply smaller banks IMO – it’s taking away some of banks’ economic power by imposing stricter capital asset requirements, and increasing national control over money by printing more money to compensate. (See below…)

    However, this would require _incredible_ international coordination in a very short time span. Lacking this luxury, the US’ best bet is unilateral inflation/devaluation – or, at the very least, using the _threat_ of unilateral inflation to move the world toward a more sustainable international money system.

  10. Am I interpreting this right — China is encouraging the use of the Yuan as a reserve currency in Belarus?

    This may be a sign of things to come. The US will eventually devalue the dollar (and the hence value of Chinese reserves) but China is obviously capable of gaining a foothold in traditional US and European spheres of influence. South America as a whole would seem to be fertile ground for this type of diplomacy.

    Things are just starting to get interesting…

  11. Thanks for your comments, statsguy. They are just as interesting as the post, if not moreso. Not that I have the background to say who’s proposals are best or even workable, but it’s great food for thought. And as you say, it’s all academic cuz we can already see how the chips are falling.

  12. polit2k:

    “…sack ’em. Sack the bank management, sack the regulators and sack the supervisors,…lie and spin and obfuscate.”

    Wonderful! A steady producer and VP of AIG Life may have heard of the Financial Products “division”, but probably has absolutely no knowledge of CDS’s. US taxpayers now own AIG, how does firing this guy make sense?

    Similarly, bank VPs who authorized purchase of AAA securities without understanding the arcane math underlying the rating, how does firing them make sense? They manage the depository business of an institution that, if it fails, becomes the property of the US taxpayer?

    Finally, the apparatchiks at the SEC and OTS and various state insurance & gambling regulatory agencies who worked on regulating CDS’s in 1990’s, how are they culpable? They were overruled by Congressional legislation that removed CDS’s from their purview.

    Who’s going to sort the problems out while managing traditional “business as usual” if not these folk?

    Your righteous indignation, laudable as it may be, is late by 2 decades. I suggest you pay attention from now on.

  13. “…a one-off $250 billion allocation of Special Drawing Rights (SDRs) to IMF member states — looks like the quickest way to put a safety net under developing countries and avert financial contagion. The Group of 20 world leaders should embrace it at the meeting in London on April 2… It could supplement a proposed doubling of the IMF’s resources and get around the reluctance of surplus countries such as China and Saudi Arabia to contribute more for now. SDRs are international reserve assets, calculated in a basket of major currencies, that are allocated to the IMF’s 185 members according to their quota of the Fund’s capital. A special issue would be a bit like a global central bank printing money to help countries with payments difficulties. …Sticklers for financial orthodoxy contend such a special issue of ‘funny money’ would reduce the IMF’s leverage to enforce structural reforms in recipient countries through the conditionality of its loans, and could be inflationary. But the proposed one-off SDR allocation is far smaller than the sums already being pumped into the system by western central banks, and it would not replace conditional IMF lending programmes for individual countries in financial distress. The move requires the support of 85 percent of the Fund’s membership. Geithner can approve up to $250 billion in SDRs without requiring Congressional authorisation…”

    and Japan has already lent $100 billion – to the IMF

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  15. Nothing will change until the ethos (which has now been completely discredited) that smartest people make it big by speculation and insane levels of leverage while producing no useful output. The lame excuses by the ‘dismal science’ that such activities serve a valid economic purpose have been exposed for what they are. If we don’t jam the brakes on this kind of activity and stop rewarding such behavior, then the looting will continue. The real problem is that the political and economic leadership is so completely in thrall to these pirates, that there is no question as to whether they will be brought to court on the reasonable grounds of misfeasance, malfeasance and non-feasance in regards to fiduciary responsibility.
    Unfortunnately as Walt Kelly put it, “We have seen the enemy and he is us.”

  16. ‘the market’ seem to think the g20 was a success – or at least ‘the media’ is attributing today’s moves, at least in part, to the g20 outcome: March 16 – “Emerging-market stocks advanced to the highest in a month and bonds and currencies surged after Group of 20 finance ministers pledged to at least double the International Monetary Fund’s bailout pool…”

    if, going forward, success relies more on the politics of distributing funds: March 11 – “European Bank for Reconstruction and Development President Thomas Mirow said the bank will offer support to Ukraine’s banks only after the country resumes cooperation with the [IMF]… Ukraine, with Romania, Hungary and Latvia, was forced to seek a bailout after the global financial crisis stifled investment… The second installment of Ukraine’s $16.4 billion IMF loan, expected last month, was delayed indefinitely after the government said it’s targeting a budget deficit of 5 percent of gross domestic product, in breach of IMF conditions…”

  17. Can’t say I’m thrilled with giving the IMF anything. All it does is go into brown people’s countries and demand that the governments there get rid, entirely, of their social safety nets, universal healthcare (if they have it), education spending, and privatize their water, natural resources, etc, by handing it all over to outside (usually US or European) corporations.

    These countries would be better off ignoring the IMF and going their own way sans US corporate control.

  18. Simon, you feel the G20 let us down and are amazed that “egregious stupidity and borderline malpractice go unnoticed in the international economic diplomacy space, or at least not picked up on by leading news sources or in the general public discussion.”

    It might help to note that there are at least three kinds of deception going on here.

    First the unconscious errors created by flawed models and incomplete data, you might call this “analytical bias”. It is certainly unintended.

    Layered on top of such analytical bias is a more-conscious kind of deception, illustrated, for example, by the notion of “stretch targets”. An executive who expects a project will take three years to complete (and knows that such projects have a tendency to overrun – perhaps because of over-optimism in the analytical bias) demands his or her people commit to deliver it in two and a half years. Who knows they may compete it early. If it is six months late it is still “on time”, relative to his/her private expectations. We play the game all the time of trading reach for realism. However, it becomes self-deception when we forget our original expectation and view the “on time” as late. It’s fine for President Obama to bluff in poker (in game theory, a little bluff goes a long way) but not so fine in the real world if he (and others) start to believe his words and lose touch with veracity. This second layer of deception might be called “managerial bias” and, when it slides into self deception, becomes a danger.

    Then, on top of the distortions of both analytical and managerial bias, there rests a third level of deception. This is the deliberate misrepresentation of the situation, called “stakeholder management” in business and “diplomacy” in international dealings.

    Sadly, if the core of the problems is lack of investor confidence, deception does not help. Once again, “the deeper you see, the more you trust”.

    Paul O’Neill (first treasury secretary in the Bush administration and former CEO of Alcoa) was right when he spoke, wonderfully disingenuously, on Fareed Zakaria’s CNN GPS show this weekend…

    ZAKARIA: Looking at the current economic crisis, do you think there is any prospect of what people call a “V-shaped recession,” that is, a quick recovery? Or are we in for a long, perhaps years of sluggish growth, what economists call an “L-shaped recession”?

    O’NEILL: You know, I’ve got to tell you, I’m praying for a V- shape. But I’m one who doesn’t believe we’re going to start moving back up until there is a credible fix for our financial system. And I think, in spite of all of the things that have been done now by the federal government, we’re not quite there.

    If I were secretary, I would do this. I would order the 19 major financial institutions to put on the Internet the classifications of their assets by investment grade rating, beginning with AAAs down through BBB-minuses, which is the final level of investment grade ratings.

    And for those parts of their asset holdings that can’t be rated investment grade — or, in fact, as they say, can’t be valued or can’t be fairly valued — I would create a new device which I call a “quarantine account.”

    One could make a judgment about the value of these institutions, and the institutions could make a self-judgment, about how much more lending capacity they had, if the quarantined assets are set aside.

    ZAKARIA: The basic idea — the basic proposal you’re making is transparency. Let everyone understand what’s on the banks’ books.

    O’NEILL: Right.

    ZAKARIA: Isn’t that a lot like Tim Geithner’s stress test?

    O’NEILL: Well, I don’t think so.

    Let me ask you a question. How do you think it’s possible to do a so-called “stress test,” if 30 or 40 percent of the assets in the institution can’t be valued?

    Here’s another plea I have. If you can’t value the assets, please don’t buy them with my money.

    ZAKARIA: You mean the government shouldn’t be buying these toxic — these assets. So you think the Treasury Department’s proposals so far are all wrong. I mean, it sounds like you think they’re doing all of the wrong things.

    O’NEILL: Well, you know, I’m not one who cares much for the notion of separating the idea of the government as some disembodied entity that has a life independent of me.

    The money that they’re committing and spending is at least in part mine. I’m a substantial taxpayer, and I don’t want my representative to buy assets with my money that I wouldn’t buy.

    Why would I want to do that, Fareed?

    ZAKARIA: But this is a pretty frontal assault then on the Treasury’s bank plan so far.

    O’NEILL: Well, you know, I don’t mean to be offensive to this administration or the last one, but it seems to me, if you’re an intelligent investor, you invest in things where there is truth and transparency. And you have a shot, if you’re a good leader, at earning the cost of capital and maybe even something more.

    And I think that basic principle ought to apply to how our government thinks about what it’s doing in the name of “we, the people.”

    You know, I really don’t like this idea that somehow the government can do things that intelligent people wouldn’t do, and we don’t notice.

    O’NEILL: … show us the money. Let us see for ourselves.

    If I was buying a company, I would not put up with someone else giving me a certification that the assets were worth something. I’d go and look in the boiler room and find out if there’s rust on the valves.

    You know, we’re talking about providing the wherewithal for intelligent investors to make decisions that they can rely on the facts. And I think the administration hasn’t gotten to the point yet of insisting that the big 19 financial institutions put their facts on the table, and for that matter, a place like General Electric put all of its facts on the table, so investors can make an informed decision.

    I’ve said this to some people, and they’ve said — some of them have said, we’d be happy to do that, and we would be OK with that. Some other major financial institutions have said, oh, my God, if we did that, people would see how bad it really is.

    I think knowing how bad it really is, is the only way we’re going to create a foundation for going forward, Fareed.

  19. Well I do not know of the remaining 80% of the IMF but if the 20% gone included those that did not speak out when the financial regulators in Basel authorized bank leverages of 62.5 to 1 as long as they lent to clients considered as AAA or AA- by one of three credit rating agencies, then I can only say good riddance.

  20. “Yes, European leaders and the Bush Administration pushed hard for the IMF to cut back on skilled and experienced staff just as the global crisis broke”…

    simon,,,this quote from you says it bush facilitated…i don’t think alot of people in this country really understand the negative impact (seriously) the bush admin had on our country to the europeans. the europeans went alng with bush just like two passing people telling each other to have agreat day. the bush and folk tarnished this country something fierce.i am ashamed to say that he was our leader for eight years. these europeans look at our voting results. we pretty much are split with ideologies. but moving more center left but is it soon enough?don’t be too hard on the europeans. they are just playing the waiting game. we need them and they need us. no more want to be cowboys ok with our presidents?i cannot stress enough the pure hell the bush years brought upon us. the europeans just want to make sure the see what this country actually believes in.

  21. Please stop encouraging politicians to spend money! They can’t control themselves. You are encouraging and justifying their reckless behaviour. I fear you may be underestimating the shrewdness of US and global politicians.

    Judging by actions and results so far, doing nothing may have been better than the ad hoc positions changing every day which are being portrayed as policy.

  22. maybe a little compassion is needed rather than the fittest will survive mentality. i’ve had enough of that shit the past eight years. the way i see it,,,it you don’t want to help your country and countrymen in time of need,,,,i will buy you a ticket for costa rica….you can live cheap,change your name,etc. hell,,,i will even throw in first years living expense. see how you will live with no connections in the biz world,, the survival of the fittest will seem brutal to you i bet. that’s how it is here with a lot of people. and quite frankly we are tired of it.

  23. Tony Plummer wrote a great book on cycles that attempts to use some social-psychology and systems theory to unite economic theory and technical analysis of markets.

    If you accept some of his admittedly assumption laden arguments, it is easy to recognise that this period of crisis is typical of a “crisis cycle”.

    The integrative elements that influence individual human behaviour – eg as the desire to belong/conform to the group – have been challenged by the shock to the collective belief system. People are defensive and accusatory… but seems natural given most people’s aversion to blaming themeselves.

    The reality is probably along the lines of George Soros idea of reflexivity. As participants in the system, many of us are probably at least in some part responsible for helping to reinforce the attitudes/behaviour that have lead us here.

    Crowd psychology suggests that these integrative or positive-feedback tendencies are likely to continue to be perpetuated given the need for conformity/acquiesence associated with a smooth social order.

  24. re: The IMF is just going to print money.

    perhaps simon can clear this up, but not according to the Treasury:

    “…SDR certificates are not connected to gold or to the IMF. The Secretary of the Treasury is legally authorized to issue SDR certificates to the Federal Reserve banks and to redeem the certificates at times and in amounts that the Secretary of the Treasury may determine. This operation involves only the Treasury and the Federal Reserve….”

    although no one seems to have told the Kremlin:

    “The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system. The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a “superreserve currency accepted by the whole of the international community,” the Kremlin said in a statement issued on its web site. The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. The Kremlin has persistently criticized the dollar’s status as the dominant global reserve currency and has lowered its own dollar holdings in the last few years. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have repeatedly called for the ruble to be used as a regional reserve currency, although the idea has received little support outside of Russia…”

  25. If truth were told, we are scared to death to take an unvarnished look at the books of our “too big to fail” banks. There and at the IMF if we don’t start with honesty and truth telling we are only fooling ourselves and any money will be “throwing it into the wind” for any good it will do. You will only be propping these institutions up with no promise of a return to a sound fiduciary state.

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